Fruit and vegetables are displayed at a traditional market in Seoul, Tuesday. Yonhap

'Korea's key interest rate to peak at 3.5% next year'

By Yi Whan-woo

Korea's economy in 2023 is forecast to grow by 1.4 percent, down from the country's estimated growth of 2.7 percent in 2022, in the midst of a prolonged global economic slowdown that will affect trade-reliant economies in Asia, a senior economist at S&P Global Ratings said Wednesday.

S&P's 2023 growth outlook for Korea is lower than forecasts from other entities in and outside Korea, such as 1.7 percent by the Bank of Korea (BOK), 1.8 percent by the OECD, 1.9 percent by Fitch and 2 percent by Moody's and the International Monetary Fund (IMF).

Louis Kujis, Asia-Pacific chief economist at S&P, also said Korea's benchmark interest rate is anticipated to peak at 3.5 percent in 2023, following the BOK's six consecutive rate hikes through November this year. The policy rate stands at a more-than-10-year high of 3.25 percent.

"We see two main headwinds for growth next year," Kujis said during an online press conference, titled "Navigating Headwinds: The Economic Outlook in A Shifting World," held jointly by S&P and Korea's credit rating agency NICE Investors Service.

The two headwinds are the global slowdown and higher interest rates.

With regard to the former, Kujis said, "The more that exports matter to your economy, the more likely it is that you'll see a slowdown and that of course affects economies like South Korea and Taiwan."

He noted Korea used to "have a quite significant surplus in recent years but will show a much smaller surplus this year" concerning trade balance.

He was referring to the widening trade deficit suffered by Asia's fourth-largest economy, with the deficit in November amounting to $7.01 billion ― the highest since the 1997-98 Asian financial crisis.

Correspondingly, he speculated "growth in South Korea will come down from about 2.8 percent this year to about half of that next year."

In relation to the high interest rate fueled by the U.S. Federal Reserve's credit tightening policy, the economist said central banks in the Asia-Pacific are anticipated to "not follow very closely the U.S. Fed policy in terms of how quickly, how aggressively to increase interest rates."

He said, "That is in part because inflation is not as big a problem over here as it is in the U.S.," adding the BOK's policy is expected to peak at 3.5 percent.

Asked whether the Asia-Pacific region is facing the possibility of financial crisis, he said the governments and corporate sectors are "better prepared" compared to the past, with exceptional cases, such as Sri Lanka and Pakistan.

He noted the countries in the region have come up with flexible exchange rates and policy improvements in the macroeconomic setting.

The press conference was joined by other economists from NICE Investors Service.